Interested in trading foreign currency exchange markets, but don’t have the time or know-how to 澳洲幸运5官方开奖结果体彩网:trade forex? Forex PꦺAMM accounts may be a good choice for you.

What Is a PAMM Account?

Percentage allocation management module, also known as percentage allocation 澳洲幸运5官方开奖结果体彩网:money management or PAMM, is a form of pooled money 澳洲幸运5官方开奖结果体彩网:forex trading. An investor gets to allocate their capital, or par🔯ts of it, to the qualified trader(s)/money manager(s) of their choosing. These traders/managers may manജage multiple forex trading accounts using their capital and such pooled money, with an aim to generate profits.

To demonstrate how PAMM accounts work in practice, let’s look at a theoretical example:

Participants in a PAMM Account Setup

• 澳洲幸运5官方开奖结果体彩网:Forex broker
• Trader(s)/money manager(s)
• Investor(s)

The investors (say Peter, Paul, and Phil) are interested in reaping profits from forex trading, but they either don’t have time to devote to trading activities or don’t have sufficient knowledge to trade forex. Enter the professional money managers (Marcus and Mathew), who have expertise in trading and managing other people’s money (similar to a 澳洲幸运5官方开奖结果体彩网:mutual fund manager), along with their individual 澳洲幸运5官方开奖结果体彩网:trading capital.

The forex trading firm signs up Marcus and Mathew as money managers for managing other investors’ money. The investors (Peter, Paul, and Phil) also sign up with 澳洲幸运5官方开奖结果体彩网:limited power of attorney (LPOA). The crux of the signed agreement is that investors agree to take the risk for the forex trades, and allow a 澳洲幸运5官方开奖结果体彩网:money manager to trade on their behalf. It als🐽o states how much (money or performance percentage) the manager will charge for his service.

Let’s assume that all three inve🐎stors chose Marcus to manage their share of money for forex trading and Marcus✃ charges 10% of the profit.

In terms of percentage contribution to the total pooled PAMM fund of $15,000, each investor has the following share. Remember, the🌳 sum total of all shares in the pool always remains 1 or 100%:

• Paul = $4,000 / $15,000 = 26.67%
• Peter = $3,500 / $15,000 = 23.33%
• Phil = $2,500 / $15,000 = 16.67%
• Marcus (Manager) = $5,000 / $15,000 = 33.33%

Suppose one trading term passes (e.g., a month) and Marcus manages to make a cool 30% profit on the pool, which now stands at $19,500 ($15,000 + 30% profit or $4,500).

He takes away his 10% charge on profit or $450.🐲 The remaining profit of $4,050 is distributed to all investors based on what percent they each have in the total pool:

• Paul = $4,050 * 26.67% = $1,080 
• Peter = $4,050 * 23.33% = $945
• Phil = $4,050 * 16.67% = $675
• Marcus (Manager) = $4,050 * 33.33% = $1,350

Assume that because of the first term’s stellar 30% gain, all three investors decide to continue with Marcus for another term. Paul and Peter stay invested with their full amount (original investment + gains), while Phil cashes out the profit, leaving only his original investment of $2,500.

Peter also refers a fr🎐iend, Pike, t💟o join the pool, and Pike brings in $2,625. Another new investor, Pam, signs up and selects Marcus to manage her $1,000. 

Let’s break down the new numbers:

Paul and Peter keep theꦯir original investment a🌞nd reinvest the profits:

• Paul: $4,000 + $1,080 = $5,080
• Peter: $3,500 + $945 = $4,445

Phil cashes out his profit:

• Phil: $3,175 - $675 = $2,500 (returns to original investment)

New investors:

• Pike: $2,625
• Pam: $1,000

Total new pool:

• $5,080 (Paul) + $4,445 (Peter) + $2,500 (Phil) + $6,350 (Marcus) + $2,625 (Pike) + $1,000 (Pam) = $22,000

New percentage shares for each investor:

• Paul = $5,080 / $22,000 = 23.09%
• Peter = $4,445 / $22,000 = 20.20%
• Phil = $2,500 / $22,000 = 11.36%
• Marcus (Manager) = $6,350 / $22,000 = 28.86%
• Pike = $2,625 / $22,000 = 11.93%
• Pam = $1,000 / $22,000 = 4.55%

Marcus manages a 15% return during this term (15% * $22,000 = $3,300) and takes his 10% ($330). The remaining profit of $2,970 will be available to the investors per their respective share:

• Paul = 23.09% * $2,970 = $685.80
• Peter = 20.20% * $2,970 = $600.08
• Phil = 11.36% * $2,970 = $337.50
• Marcus (Manager) = 28.86% * 2,970 = $857.25
• Pike = 11.93% * $2,970 = $354.38
• Pam = 4.55% * 2,970 = $135.00

The𒁏 total pool now stands at $24,970, and the breakdown by participant is as follows:

• Paul = $5,080 + $685.80 = $5,765.80
• Peter = $4,445 + $600.08 = $5,045.08
• Phil = $2,500 + $337.50 = $2,837.50
• Marcus (Manager) = $6,350 + $857.25 = $7,207.25
• Pike = $2,625 + $354.38 = $2,979.38
• Pam = $1,000 + $135 = $1,135.00

Next, let’s assume all the investors continue with the above investments for another month with Marcus, who unfortunately loses 20%. This means no 10% profit share for Marcus and each investor will see their share of the po🌌oled investment drop by 20%, bringing the pooled money down $4,994 🐟to $19,976:

• Paul = $5,765.80 - 20% = $4,612.64
• Peter = $5,045.08 - 20% = $4,036.06
• Phil = $2,837.50 - 20% = $2,270.00
• Marcus (Manager) = $7,207.25 - 20% = $5,765.80
• Pike = $2,979.38 - 20% = $2,383.50
• Pam = $1,135 - 20% = $908.00

At the end of each term, investors have the choice to continue with the money manager, switch to another money manager partially or fully, or cash out the capital.

Role Considerations

The role of a forex broker is to:

• Provide a secure, reliable platform that allows money managers and investors to connect
• Facilitate the trading activities of money managers within the realms of allowed regulations
• Facilitate the account keeping, deposits, withdrawals, and other related activities
• Allow transparent review, feedback, rating, and related mechanisms for investors and money managers to select and interact with each other

How Do Investors Select Money Managers?

Brokerage firms offer numerous ways for investors to make anꦚ informed choice, including detailed CVs, qualifications, past performances in terms of returns, amounts of money managed, numbers of associated investors, positive/negative reviews, etc. about their traders/money managers. In addition, there are outside rating systems. Here is a screenshot from Alpari’s PAMM account rating system:

Things to Keep in Mind About Investors

• Usually, the investors have no choice of forex 澳洲幸运5官方开奖结果体彩网:trading assets, except for those offered by the money manager.
• They carry the risk of losing their capital due to trading activities of money managers, but also enjoy the potential of returns if the manager performs well.

Things to Keep in Mind About Money Managers

• They have access to the money only in their pool. They cannot pull money from investors’ trading accounts. For example, Paul may have a total of $9,000 in his forex 澳洲幸运5官方开奖结果体彩网:trading account, but since he has allocated only $4,000 to Marcus, Marcus cannot trade beyond that $4,000.
• They can set a minimum and a maximum amount criteria for investors.
• They can accept or deny new investors as they wish.

The Bottom Line

PAMM accounts are a simple method for individuals to invest their capital with money managers for forex trading. With these accounts, investors benefit from profits with minimal involvement. However, PAMM accounts also carry the risks of 澳洲幸运5官方开奖结果体彩网:capital loss, if a manager underperforms. After understanding their desired profit potential and risk aversion, individuals should perform 澳洲幸运5官方开奖结果体彩网:due diligence in selecting a PAMM ac🧸count broker and money manager.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our 澳洲幸运5官方开奖结果体彩网:warranty and liability disclaimer for more info.